Global Money Flocks To India As PM Modi Hobnobs With Elon Musk, Ray Dalio

Prime Minister Narendra Modi's trip to the US couldn't have come at a better time. A buzzing economy, equity benchmarks at record highs and a rapidly growing consumer market all make for a great advertisement as he pitches the country's potential to American corporate executives and investors.

Stocks in India have lured a net $8.7 billion in foreign inflows since March, set to be the most in any quarter since the end of 2020. Rupee-denominated bonds are on track to witness the longest streak of monthly buying by overseas funds in almost four years, while the local currency is offering the second-best carry returns in Asia this year, according to Bank of America.

PM Modi's visit promises more: Tesla Inc. is likely to make a significant investment in India, Chief Executive Officer Elon Musk said after meeting PM Modi, who also urged Bridgewater Associates founder Ray Dalio to deepen investments in the country. General Electric Co. and Hindustan Aeronautics are set to sign an agreement during PM Modi's trip to produce engines for India's fighter jets.

"Investors agree that India is passing through a 'Goldilocks' phase," Samiran Chakraborty and Baqar Zaidi, economists at Citigroup Inc., wrote in a note this week after meeting equity and fixed-income investors in London.

The gush of foreign money and a retail-investing boom brought about by the pandemic have propelled benchmark NSE Nifty 50 Index to all-time highs, with the gauge up almost 9% this quarter.

While that's made stocks expensive relative to history and raised the premium they typically command over emerging-market peers, the allure of steady economic and earnings growth, political stability and a supportive monetary policy is keeping investors enthused.

These attributes make the nation of 1.4 billion people stand out amid a slowing global economy, with its appeal burnished by China's tepid post-pandemic recovery and its tensions with the West.

Investors seem willing to hold on to their 'long' India positions despite rich valuations, the Citi economists wrote. "There was no discerning fear of any immediate reversal of these portfolio flows."

Strategists at UBS Global Wealth Management and Societe Generale this week upgraded their India views.

Still, there are risks on the horizon. A delayed arrival of monsoon rains, critical to inflation and growth, could derail India's consumption recovery. Further, a sharp rebound in China - where equity valuations have become too cheap to ignore for some money managers - could hurt Indian stocks as they have been touted as one of the key beneficiaries of the rotation away from China.

Bonds, Rupee

Investors are locking in high yields in local-currency Indian debt as the central bank is seen on a rate pause till early next year. Foreign buying has been concentrated in the government bonds eligible for index inclusion with JPMorgan Chase & Co's next review due later this year.

The yield on the benchmark 10-year bond has dropped about 40 basis points from a March high, helped by easing inflation and a surprise pause in the April policy by the Reserve Bank of India.

"Year-to-date, the market has absorbed supply smoothly on moderating inflation, and expectations of a peaking policy rate in India," Standard Chartered Plc strategists including Nagaraj Kulkarni wrote in a note. "We maintain our positive outlook."

The Indian rupee is trailing only the Indonesian rupiah this year. The sharp decline in the nation's current account deficit, helped by lower crude oil prices and rising services exports, is buoying sentiment toward the currency.

Dollar bonds issued by Indian corporates are also outperforming regional peers. Improved financial health of companies, coupled with non-performing asset ratios at banks near their lowest in a decade, have raised the appeal of corporate debt. The nation's junk bonds have handed investors 5.3% this quarter even as China's high-yield debt recorded a loss of 9.1%.

"Clearly, India's favorable growth prospects, relatively younger population, as well as increasing trend toward a China+1 strategy has helped to attract investment overall," said Mitul Kotecha, head of emerging markets strategy at TD Securities. He sees the trend of foreign buying in bonds sustaining in the second half of the year.